Unpacking your Homeowners Policy: Part 5 – Unclear Deductibles and Covered Perils
When most homeowners think about their insurance policy, they focus on Coverage A (dwelling), Coverage B (other structures), and Coverage C (personal property). But just as important—and often overlooked—is understanding how deductibles work at claim time and what perils are covered.
Unfortunately, many homeowners don’t fully understand these things and this can lead to unpleasant surprises at claim time, especially when homeowners realize they’re responsible for a much larger out-of-pocket expense than they expected.
Let’s break down what you need to know about deductibles and covered perils, and why it’s critical to review your policy regularly to avoid unnecessary financial shocks.
How Home Insurance Deductibles Work (And How They Can Surprise You)
Percentage Based Deductible Pitfalls
We briefly touched on deductibles several times in this series, but let’s take a deeper dive into how your out-of-pocket costs are determined when you file a claim.
An effective way to drive down policy premium cost is for the insurance company to pass a greater amount of risk back to the insured. Many of us call this the self-insurance amount. Meaning the amount that the insured will self-insure for. One of the ways insurance agents do this is by increasing the policy deductibles. A modern trend that is seemingly going to stay a while is the use of percentage-based deductibles. Percentage based deductibles can be a way to make a large deductible have less shock value when presenting the idea to the client. They do look nicer on an insurance quote as 1% doesn’t look as ugly as $7,000 for instance.
However, the clients in my experience don’t always fully understand what they agreed to because this deductible model is based on a percentage of the Coverage A Dwelling Amount and not a percentage of the loss amount or the premium amount
For example: If you have a $700,000 Coverage A amount, a 1% deductible is $7,000.
While many homeowners are comfortable with this for large claims, but it effectively eliminates coverage for small and mid-sized claims—leaving them with damage they’ll have to pay for out of pocket.
In most cases, it makes sense to schedule lesser values personal property to help offer coverage and piece of mind with these high deductibles.
The Hidden Increase: How Your Deductible Grows Over Time
A commonly overlooked issue with percentage-based deductibles is their compounding growth over time. Most home insurance policies include an inflation protection endorsement, which automatically raises your Coverage A limit by 4% per year.
That means if you had a $700,000 Dwelling Coverage A and that amount of insurance grew by a compounding 4% annually, the Dwelling Coverage A will be $921,152 in just 7 years. Thus, increasing the insureds deductible from $7,000 to $9,215 in 7 years. Or, an increase of nearly 32%.
Most homeowners don’t realize this is happening because it happens gradually—until they file a claim and realize their deductible has skyrocketed.
Multiple Deductibles: The Fine Print Most People Miss
Many home insurance policies now have two separate deductibles to pass more risk back to the insured. While this is a great strategy to help mitigate premium cost it should be explained to prospective clients and insureds with full transparency.
A common example is as follows:
- A deductible – Example: $2,000 for general claims.
- A separate Wind and Hail Deductible – Example: 1% of Coverage A. or a much larger deductible, for example, $10,000
At first glance, homeowners see the $2,000 deductible and focus on this more than the 1%. And rightfully so as there are far more perils that which the $2,000 deductible would apply to.
In states like Illinois, the vast majority of home insurance claims stem from wind and hail damage. While percentage-based deductibles typically apply to fewer types of losses compared to a flat-rate deductible (such as $2,000 for all perils), the likelihood of a homeowner’s next claim being related to wind or hail is significantly higher.
Because of this, many homeowners opt for a higher wind and hail deductible in exchange for lower annual premiums, accepting the trade-off that if a claim does occur, it’s more likely to be subject to the larger deductible.
Understanding Covered Perils: What’s Actually Protected?
Even if you understand how your deductible works, that only matters if your loss is covered by the policy contract. A peril is an event that causes damage—like fire, wind, or theft. Your home insurance policy only covers specific perils based on the type of coverage you have.
There are four common levels of peril coverage in Illinois:
- Basic Policy – Covers a limited number of specified perils. (Least expensive, but the most restrictive.)
- Broad Form Policy – Covers more perils but still has exclusions.
- Named Peril Policy – Covers only the perils specifically listed in the contract.
- All-Perils Policy – Covers all risks except for explicitly excluded perils. (Most comprehensive and expensive.)
Most policyholders don’t know what type of policy they have—because covered perils aren’t typically listed on the declarations page. This means that before binding a policy, homeowners should demand a full breakdown of which perils are covered and which aren’t.
What About Subsequent Losses?
Insurance policies vary in how they handle secondary damage caused by an uncovered peril—and this difference can have a significant impact on your payout.
Some insurance companies, particularly in the captive carrier market—have stricter coverage limitations that exclude not just the original uncovered peril but also any damage resulting from it.
Example: Suppose your policy does not cover earthquakes, but an earthquake causes a fire in your home.
- Some policies may deny coverage entirely because the fire was triggered by an excluded event.
- More comprehensive policies would still cover the fire damage, even though the earthquake itself wasn’t a covered peril.
While this might seem like a small distinction, it can be the difference between receiving a partial payout or having to pay for the entire loss out of pocket. Reviewing how your policy treats subsequent losses can help ensure you’re not left with unexpected gaps in coverage.
Final Thoughts: What Every Homeowner Should Do Now
Home insurance policies aren’t just about the stated amount of coverage on your policy declarations pages. Rather, they are about the covered perils and specific coverage detailed in your policy contract.
What You Need to Do Today:
- Review your deductibles – Check if your policy has separate deductibles for wind/hail vs. all other perils and understand how much your out-of-pocket costs really are.
- Look at your inflation rider – If your policy has an automatic increase in dwelling coverage, and you have percentage based deductibles, make sure you’re prepared for larger self insurance amounts in the future.
- Ask your agent about covered perils – If you don’t know whether your policy is basic, broad, named-peril, or all-perils, it’s time to find out.
- Confirm if your policy covers subsequent losses – The best policies cover resulting damage even if the original peril was excluded.
By taking the time to understand these details now, you can avoid costly surprises at claim time and make sure your home is fully protected.